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World Wrestling Entertainment, Inc. (NYSE:WWE)

Q1 2014 Earnings Conference Call

May 1, 2014 11:00 AM ET

Executives

Michael Weitz – Senior Vice President-Investor Relations & Financial Planning

Vincent K. McMahon – Chairman, Chief Executive Officer and Co-Founder

George A. Barrios – Chief Financial Officer

Analysts

Daniel Moore – CJS Securities, Inc.

Laura Martin – Needham & Company

Jamie Clement – Sidoti & Company, LLC

Andrew Peranick – Bastogne Capital Management, LLC

Robert Routh – National Alliance Capital Markets

Brad Safalow – PAA Research

Lance Vitanza – CRT Capital Group

Operator

Hello, and welcome to the webcast entitled WWE First Quarter Earnings. We have just a few announcements before we begin. If you are logged into the webcast, please note that the slides will not advance during the presentation, you will only see the title slide.

Please download the full slide presentation via the resources, which is at the bottom of the webcast screen. Also at the bottom of your screen, you will find a help icon for technical assistance. (Operator Instructions)

I will now turn the call over to Michael Weitz, SVP, Financial Planning and Investor Relations. Please go ahead, Michael.

Michael Weitz

Thank you, and good morning, everyone. Welcome to WWE’s first quarter 2014 earnings conference call. Leading today’s discussion are Vince McMahon, our Chairman and CEO; and George Barrios, our Chief Strategy and Financial Officer. We have posted our presentation for today’s call, and a detailed financial release on our website, corporate.wwe.com.

As you review these documents, please note that the launch of WWE network coupled with the continued convergence within the media landscape has resulted in a change in the company’s management reporting. These changes necessitated a change in the company’s segment reporting to align with management’s operational view. These changes are outlined in our press release and filings with the SEC. For your reference and to evaluate trends in the business on a consistent basis, we have posted a pro forma trending schedule covering the period from 2011 to present on our website.

Today’s discussion will include forward-looking statements. These forward-looking statements reflect our current views and are based on various assumptions, and are subject to risks and uncertainties disclosed from time-to-time in our SEC filings. Actual results may differ materially, and undue reliance should not be placed on them.

Additionally, the matters we will be discussing today may include non-GAAP financial measures, reconciliation of non-GAAP to GAAP information is set forth in the notes to this presentation, which is available on our website at corporate.wwe.com.

Finally, as a reminder, today’s conference is being recorded, and the replay will be available on our website later today. At this time, it’s Michael Weitz to turn the call over to Vince.

Vincent K. McMahon

Good morning, everyone. To give you some idea of the perspective of our performance in Q1, our key metrics, live events, as well as television ratings were pretty much flat. We’ve had lower results from licensing, principally from the video game contract structure, which quite frankly George will be able to give you some color on.

And our improved results from our WWE Studios in terms of the performance of the call, everyone of course is aware of larger of our WWE network, which we launched on February 24. As of April 6, we had 667,000 of subscribers, that’s in addition to a pay-per-view audience as well of some 400,000. So the combination, that’s all domestic by the way. The combination of that would put us over 1 million buys, which is the best we’ve done perhaps average I recall in terms of WrestleMania wise. So WrestleMania look pretty good as well as the launch of the network, and stick it again, if the network, it’s been well received by fans as well as industry experts.

We continue to state that we will meet our 1 million subscriptions by the end of the year. We just actually in terms of distribution of Xbox One game on board, Amazon Fire TV and Smart TVs will continue to come online shortly. In terms of rolling out of our international markets where we do not work, we are formulating plans in execution for that.

Our content licensing agreements as far as India is concerned, we’re in the middle of negotiations there, which should be big for us. Domestically, we’ll be announcing in several weeks what we’re doing domestically as we complete negotiations.

In terms of achievements, we announced as well that tele buyers as well as – these are television outlets in Germany, which were going to have a much broader perspective, and much broader distribution over in Germany, which would turn that into even a much better market for us as it has been in the past.

We launched Slam City, which is animated short-form series for kids successfully. We as well continued to renew our relationships and partnership with some blue-chip companies like Pepsi and General Mills. Of course we have recently had a movie release with Scooby-Doo innocuous, they are expected to meet or like we would exceed targeted profit. And we continue to execute our strategic initiatives in a way that transforms our business. George, I will send it over to you?

George A. Barrios

Thanks, Vince. There are several key topics that I’d like to review today. These include management discussion of financial performance and the progress of our key strategic initiatives.

For the first quarter, our financial results exceeded our guidance as our net loss of $8 million compared favorably to a target loss of $12 million to $15 million. Our results as measured by OIBDA declined $18.5 million dollars from the prior year quarter as we launched WWE Network and realized a reduction in video game royalties, at least in part due to timing. I’ll explain more about the nature of this impact momentarily.

The quarter was highlighted by the launch of WWE Network on February 24. The network became the first ever 24/7 streaming network that combines linear programming, which showcases our premium content with a massive on-demand library, whereas we like to think about it, it’s like Netflix, just better.

The remarkable depth of programming and easy-to-use interface has been embraced by fans and applauded by industry observers. On the broadcast of WrestleMania on April 6, we reported that the WWE Network had attracted more than 667,000 subscribers, a remarkable feet in just a 42-day period.

On an annualized basis, the 667,000 subscribers reported would represent approximately $80 million in revenue, which is roughly 30% more than the average revenue of our domestic pay-per-view business over the past three years.

Regarding future subscriber growth, we expect a gradual ramp-up over time as consumers change behavior and adopt new technology, particularly as new platforms increase the size of the addressable market. As such, we believe the network is on track to achieve 1 million subscribers by year end, and 2 million to 3 million subscribers at steady state.

The recent performance of WrestleMania, which yielded nearly 400,000 domestic pay-per-view buys demonstrates a meaningful base of potential subscribers. With a keen interest in WWE, this could be converted to the network over time.

To attract subscribers, we’ll execute a five-part strategy that includes creating new content, entering new geographies, expanding distribution platforms, developing new features and executing high-impact marketing campaign.

New content network includes Monday Night War, WWE Countdown Season 2 and Tough Enough to name a few. Over the next few months, we expect to launch on several platforms, including Xbox One, which we announced yesterday, Amazon Fire TV and SelectSmart TV.

In the near future, we’ll also plan to deliver new features, such as book marking capabilities to leave resume play at a later date, and play list tool to identify favorite content. We’re now highly focused on expanding the network in the U.S., and international markets.

Our comprehensive consumer research demonstrates that more than 50% of TV homes across WWE’s top global markets were about 120 million homes, report some level of affinity for WWE content. And among these WWE homes, more than 80 million are classified as active, representing more than 170 million passionate and casual fans.

Moreover, we believe that we have the potential to re-engage some portion of 40 million homes with less graft bands in these markets. In our view, taking advantage of WWE’s tremendous brand strength to expand the network globally, we’ll provide a platform for driving long-term growth over the next several years.

To review the key drivers of our performance in the quarter, let’s turn to Page 5 of our presentation, which lists the revenue and OIBDA contribution by business as compared to the prior year quarter.

Total revenues increased by approximately $2 million based on the increased monetization of content, and improved performance from our movie business. These increases were partially offset by lower video game royalties.

Network revenues, which include revenue generated by WWE network, pay-per-view, and video on-demand increased 15% to $18.4 million as the ramp-up of network subscribers and subscription revenue more than offset a decline pay-per-view revenue.

WWE network generated $4.4 million in subscription revenue with approximately 495,000 subscribers at quarter end, at a retail price of $9.99 per month. Following the broadcast of WrestleMania 30, which aired live April 6 on WWE Network and on pay-per-view from cable and satellite providers, the company announced that WWE Network had reached over 667,000 subscribers.

The $4.4 million of network subscription revenue was partially offset by $1.3 million decline in pay-per-view revenue. Pay-per-view revenue declined 9% to $13.8 million driven by 10% decline in buys for our Royal Rumble and Elimination Chamber events with weaker performance in some international markets.

Home Entertainment revenues increased $3.5 million to $10.5 million reflecting adjustments related to prior year sell through estimates and contractual guarantees.

Specifically, the quarter reflected the recognition of a $2.5 million minimum guarantee related to 2013 sale, and a $2.2 million adjustment for higher current sell-through rates than anticipated for our late 2013 releases.

As a result of the latter adjustment, returns represented 24% of gross domestic retail revenue as compared to 49% in the prior year quarter. These factors were partially offset by a 17% decline in the average effective price to $7.88, and an 11% decline in unit shift.

Television revenues increased 8% or $2.9 million primarily due to second season production and monetization of Total Divas, which began airing in March 2014 with no comparable program in the prior year quarter, and contractual increases for existing programs.

Additionally, the increase in television revenues reflected one additional episode of Raw in the U.S. due to an additional Monday in the first quarter of 2014 compared to the first quarter of 2013.

Revenue from our movie business WWE Studios increased $2.4 million from the prior year quarter. The growth was primarily due to the strong performance of The Call, which was released theatrically in March 2013.

WWE Studios’ movie portfolios generated income of $1.6 million in the quarter compared to a loss of $5 million in the prior year quarter, which included $4.7 million in film impairment charges. Recent movies such as Scooby-Doo! WrestleMania Mystery release direct to DVD in March and Oculus released theatrically in April have delivered strong performances that are in line with our expectations.

The company’s movie releases since late 2012 are currently expected to generate an IRR of over 15% exceeding WWE’s cost of capital. Line event revenues increase 3% or $0.7 million from the prior year quarter, primarily due to increase in the average effective price across our events in North America. Average ticket prices at our events in North America increased 6% to nearly $42 attributable in part to changes in venue mix, and to a lesser extent, the introduction of the VIP ticket packages, which were initiated in the second quarter last year.

Average attendance at 6,400 fans at our North American event was essentially unchanged from the prior year quarter. The impact of staging three additional events in North America was essentially offset by the timing of three fewer events in international markets.

Offsetting the increased monetization of content and growth from WWE Studios, our licensing revenue declined $10 million from the prior year quarter. This decline reflected lower video game royalties, which derived predominantly from the transition to a new video game licensee Take-Two Interactive.

Entering a new relationship with this licensing at the start of 2013, led to contractual changes in our distribution agreement. These changes include staggered royalty rates that increased with higher levels of cumulative video game retail sales throughout the year.

As such, current quarter royalty rates were lower than what prevailed one year ago. Importantly, estimated North American unit sales and retail revenue for our franchise game were effectively unchanged versus the prior year period and compared favorably to a 33% industry decline in current generation software sales.

Now, while some portion of the current rate variance maybe due to timing, our current forecast contemplates that pricing pressure could dampen video game revenue, and thereby potentially impacting overall royalty rates for the full year.

Additionally, impacting the current quarter decline, video game revenues in the prior year quarter included a $2 million one-time benefit associated with the termination of our former video game licensing agreement with THQ.

Corporate and other expenses increased $5.3 million to $37.7 million from the prior year quarter. As defined, these expenses include certain sales, marketing, and talent development costs, which have not been allocated to specific lines of business.

The increase in corporate and other expense during the quarter was driven by a $2.5 million increase in professional fees, and increased salary and personnel expenses to support key business objectives.

Headcount increased 5%, primarily to build our talent development in international infrastructure. Overall, company salary expenses increased $2.5 million with an 8% increase in headcount.

Operating income before depreciation and amortization OIBDA, declined $18.5 million dollars primarily due to the lower results from our video game licensing. WWE Network launch cost, as well as continued investment to support key business objectives.

An $11 million decline in licensing profits stemmed from the transition to a new video game partner, including contractual changes in the company’s video game licensing agreement and a $3.4 million benefit to the prior year quarter associated with the termination of our prior video game licensing agreement.

The launch of the WWE Network resulted in an $8.6 million negative impact to OIBDA from the ramp up of customer service, programming and marketing costs. The resulting decline in operating profits for the quarter was partially offset by improved performance from our WWE Studios including the absence of current quarter impairments, and the revenue driven growth in the Home Entertainment businesses as described earlier.

Net income declined $11 million reflecting the decline in OIBDA results. Our effective tax rate was 36%, compared to 37% in the prior year quarter.

Page 12 of the presentation contains our balance sheet. As of March 31, 2014, the company held $87.3 million in cash and short term investments, and currently estimate debt capacity under the company’s revolving line of credit to be approximately $90 million.

Page 14 shows our free cash flow, which reflected a $13.6 million use of cash in the quarter. This use of cash was driven by the operating loss in the quarter, including expenditures to launch WWE Network and associated content development as well as spending to produce feature films.

As stated previously, the outcome of our content negotiations and the rate of subscriber adoption to the network are important components of our 2014 and future financial performance. Regarding our TV licensing agreements, we are continuing to negotiate with potential distribution partners in the U.S. and India.

Given that we are currently in discussions, we will not be answer any questions today about the status of these negotiations. Over the past several years, we’ve invested in people, and technology and we continue to believe the successful execution of our key initiatives could potentially result in doubling or tripling our 2012 OIBDA results to a range of $125 million to $190 million by 2015. We’ll provide more information and further guidance for 2014 and 2015 as appropriate.

For the second quarter of 2014, we expect net income to decline sequentially from the first quarter this year by a range of $7 million to $10 million, resulting in a net loss of $15 million to $18 million. The decline in earnings reflects increased live event profit due to WrestleMania 30, which are expected to be more than offset by network costs, seasonal decrease in licensing business, and lower result from home entertainment, reflecting especially tough comparisons to our first quarter adjustments discussed earlier.

Importantly, we view the WWE network as a major source of long-term earnings growth well beyond 2015. And we’re planning to initiate the network’s global launch later this year. To track the progress of this key initiative, we plan on reporting network subscribers on a quarterly basis.

Looking ahead, we believe that the expansion of a global WWE Network can drive long-term growth and right economic returns that better reflects WWE’s tremendous global appeal and brand strength.

That concludes this portion of our call, and I’ll now turn it back to Michael.

Michael Weitz

Thank you, George. Joe, we’re ready now. Please open the line for questions.

Question-and-Answer Session

Operator

Thank you. We’ll now begin the question-and-answer session. (Operator Instructions) And our first question here comes from Mr. Daniel Moore from CJS. Please go ahead.

Daniel Moore – CJS Securities, Inc.

Good morning. Thanks for taking the question.

George A. Barrios

Good morning, Dan.

Daniel Moore – CJS Securities, Inc.

Curious, does your Q2 guidance imply given all the moving parts, an increase in revenue year-over-year or just trying to get a little better handle there.

George A. Barrios

Year-over-year or sequentially, Dan?

Daniel Moore – CJS Securities, Inc.

Year-over-year.

Vincent K. McMahon

We’re going to stay away from giving revenue guidance, but it will be in a fairly tight range to last year.

Daniel Moore – CJS Securities, Inc.

Got it. And then looking forward, I know you’re not giving guidance, but if Q2, can we think about that as sort of a short-term peak in terms of investment spend relative to the network in the short run, or do you expect the growth related investment spend to continue to grow as we get into the back half of the year, in early ‘15.

Vincent K. McMahon

From a fixed cost perspective, we’re close to steady state on the network. So it’ll be more marketing cost, customer service, some which are variable, the marketing especially on the one-week free trial, but from a fixed cost perspective, we’re pretty much there. Big change and it’s in the network segment is the costs related to producing WrestleMania sequentially. Right, so that now is part of the network segment, so you see a big, you’ll see a big bump in those production costs and that’s a seasonal element.

Daniel Moore – CJS Securities, Inc.

And how about things like marketing and promotion and those obviously had pretty strong – are those lumped in so that production costs, just trying to think about how, when we see Q2 numbers how they might ramp – those costs might ramp going forward?

Vincent K. McMahon

Yeah, the marketing costs pretty much will see, won’t have as much of a seasonal impact. So it’s not that they’re ramping up. What we see in the second quarter as those production costs for WrestleMania, but most of the other fixed costs will – you won’t see much of a seasonal impact.

Daniel Moore – CJS Securities, Inc.

And obviously you made great strides and on track to hit or exceed the 1 million subscribers by year-end. Can you give us a sense of what you are – what a range of expectations would be for subscribers, perhaps for 2015, that’s embedded in your OIBDA guidance range?

Vincent K. McMahon

At this point, we’re not going to do that. I mean what we’ve said obviously is that, $2 million to $3 million it’s steady state. It’s transformational, and it’s $50 million to $150 million of incremental OIBDA even net of pay-per-view cannibalizations, so we really haven’t put a time stamp on that.

Daniel Moore – CJS Securities, Inc.

And I’ll try one more and jump back in queue. The international, sounds like you are on track or maybe a little ahead of schedule. Remind us what some of those first markets will be looking to rollout in Q4, and you expect the international rollout to be dilutive, or neutral or accretive in 2015?

Vincent K. McMahon

So, we said publicly is that we will launch by the end of 2014, early 2015 in the UK, Canada, Hong Kong, Singapore, Australia and New Zealand and the Nordics, and we feel really comfortable that we’ll get those one at least those launches done in that timeframe.

George A. Barrios

As far as whether it’s dilutive or accretive, what we’ve said publicly is that you require about 250,000 subscribers to break-even, and then it’s accretive after that, but we haven’t put a time on that either.

Daniel Moore – CJS Securities, Inc.

Got it. And I’ll sneak one more in. What are your expectations for churn with regard to the network and when do you think – given that obviously we just launched. When do you think you’ll have the first meaningful expectations that those are on track or even perhaps a little conservative?

Vincent K. McMahon

Yeah, I think, it will – we’ve modeled our churn assumptions looking at the industry, so as much information as we could get from, because there’s different levels of churn, there’s the overall NVPD churn, there’s the actual service churns so we’ve looked at things like HBO, we’ve looked at things like Netflix, and use that for modeling purposes, which puts you in that 6% to 8% a month range.

I think, we still got a wave to go before we know enough to say are we below that or above that? And that on an ongoing basis, right now it’s pretty lumpy.

Daniel Moore – CJS Securities, Inc.

Got it. I will resist the temptation to ask you about the negotiations, and congratulations on getting the networks up and running. I’ll get back in queue.

George A. Barrios

Thanks, Jim.

Operator

And, thank you. Our next question comes from Laura Martin from Needham. Please go ahead.

Laura Martin – Needham & Company

Hi, there. Can you hear me, okay.

George A. Barrios

Yeah, we can Laura.

Laura Martin – Needham & Company

Great, great. So, Vince one for you. First of all I loved your positioning as a Netflix, I’ll turn it in a better, because I cover that quick, and I love the fact, that you own all your content right. It sounds like you’ll be in more international markets that may or after five years at the end of 12 months. So, thought that for owning all your company right there a bit.

My question is on the $2 million to $3 million stats. I’m curious since that, how you get to that number given I thought, what I heard you say there is the market size here, you’ve got a 140 plus about $40 million laps. It feels like the cam could be bigger like, why can’t you get the $6 million stats. Could you just kind of sized for me, how you’re getting to that $2 million to $3 million subs globally, and is that your final number?

Vincent K. McMahon

Yes, okay. A little bit of apples and oranges, the $2 million to $3 million that we’ve been public would – we’re, is domestically. And those other numbers I mentioned we’re internationally. And what we’ve said is for the countries that I mentioned those eight countries including UK and Canada and so on, that the opportunities in those countries were somewhere between 500,000 and 750,000 subscribers at steady state. Now get specifically on the $2 million to $3 million domestically, and as we’ve said before, we’ve done a lot of consumer research in all these countries to get an understanding of both the size of our fan base, the level of affinity of that fan base and then their appetite for the network. So the numbers are just based on primary research we’ve done.

George A. Barrios

Laura, answer to your question, the 2 million to 3 million, I believe is very conservative.

Laura Martin – Needham & Company

Right. And if you look at any other form of media international that released its figures to the U.S. So I would guess whatever you get in U.S., over time it will be doubled by the offshore number. So I will be shocked, I would actually make you guys a big that sort of a lot more than 500,000 outside of the U.S. if you get 3 million in the U.S. something like that, that’s helpful, I appreciate that. And really great numbers you guys have, great job launching forward-looking OTT network. I think it’s going to work out great for you guys. Keep it up.

George A. Barrios

Thanks.

Vincent K. McMahon

Thanks Laura.

Operator

And thank you. Our next question comes from Jamie Clement from Sidoti & Company. Please go ahead.

Jamie Clement – Sidoti & Company, LLC

Good morning, gentlemen.

Vincent K. McMahon

Hey, Jamie.

Jamie Clement – Sidoti & Company, LLC

Can you talk – now that the U.S. launch has been done, can you talk a little bit more you’ve alluded to some of these things on past calls, but some of the operational nuances of watching internationally. I think we’re most of us said we tail well, it’s pretty much just the same thing. It’s clearly not though, so – do you have to think about things on a country-by-country basis, region-by-region basis and within those regions what do you – what are the kind of things that you’re aware of that we should be aware of as we think about the international launch?

Vincent K. McMahon

You know, Jamie, we’re still working through all those things, I’m not going to get into lot of color because our – again we’re working through it now and learning. What I will say we talked a lot about social media and those 300 million plus points and how valuable they are to understand our consumers. One of the things that more than half of those 300 million are outside the U.S., one of the things that come through loud and clear is people wanted as quickly as they can get, so we’ve taken that into consideration. And you’ll be hearing more here in the weeks ahead.

Jamie Clement – Sidoti & Company, LLC

All right. From a marketing perspective or like a – kind of how you market and advertise it, I mean thematically would you expect it to be kind of similar because I mean at the end of day, the core of your product is still in red?

Vincent K. McMahon

Yeah, I think so, Jamie, look – if you’re WWE fan, and you’re one of those 80 million active, they like what we do and we know they like it, and so I think there is a common message.

Jamie Clement – Sidoti & Company, LLC

Okay, fair enough. Thank you very much.

Vincent K. McMahon

All right and welcome back by the way.

Jamie Clement – Sidoti & Company, LLC

Thank you very much, I appreciate that.

Operator

And thank you very much. Our next question here comes from Mr. Andrew Peranick from Bastogne Capital. Please go ahead.

Andrew Peranick – Bastogne Capital Management, LLC

Kind of walk through a little bit of the network numbers again. Obviously you talked about the annualized $80 million of revenue at the network right now. Based on some of the earlier slides from the January presentation of break-even at a million with some subs or 60 million of cannibalization as well as some comments, that I believe you made in an interview regarding the network itself pre-cannibalization getting to break-even profitable of 400,000 subs, we are getting need to the gross margin of about 80% to 85% or 83% on the network. Does that sound about right?

Vincent K. McMahon

Yeah. I will use the different terms and variable margins sit around there, so the network revenue less than direct costs and or splits depending on which platforms we’re on, you will sit somewhere at between 80% and 90%.

Andrew Peranick – Bastogne Capital Management, LLC

Okay. And by that math there is around $40 million of fixed costs assuming. Okay – If I do that math right now pre-cannibalization at $80 million of revenue, the network itself – again pre-cannibalization is generating about $26 million of EBITDA.

Vincent K. McMahon

Yeah, so the question you are saying if you pulled out the pay-per-view element, we view the network break-even is around 400,000, you are pointing we have those 670,000 for a full year. The math is generally corrected in that math. We think the pay-per-view cannibalization is a important part of looking at, which is why we concluded it in the network segment, both revenues and costs, but the math you are doing is directionally correct.

Andrew Peranick – Bastogne Capital Management, LLC

Okay. And I agree. So then my next question will then be on cannibalization. I think we talked about this in the past how in all three scenarios, 1 million to 3 million domestically you kept it at 60 million. I’m assuming then that includes zero pay-per-view wise – including zero pay-per-view wise at WrestleMania.

Vincent K. McMahon

That’s right. So when we put those numbers out just because we wanted to show the most conservative on the cannibalization, that’s what those numbers in tail then obviously we had more than zero by, so if you wanted to look at that break-even number with those pay-per-view wise, it’s obviously can be a little bit less than million subscribers we talk about.

Andrew Peranick – Bastogne Capital Management, LLC

Right, okay. So then I guess, kind of what I’m really trying to dig into here is to understanding that bucket of 60 million. As I look back in terms of 2012 EBITDA from pay-per-view it was about 45 million, it was about 35 million for 2013. Can you give me what the number is of that 60 million that you is considered pay-per-view flow cannibalization and some question of that would be, is that the total number that you took out or is part of that international that’s not factored in the 60 million. How should I think about that?

Vincent K. McMahon

Yes. You shouldn’t obviously looking EBITDA, because EBITDA includes a kind of fixed cost that’s – are still with us to produce the show. So you have to look at the variable margin on pay-per-view domestically. So if you lose all the domestic pay-per-view, you look historically that’s has been about $65 million, got about an 80% or 85% variable margin, you’re down into the 50s on variable margin that you would lose and we also knew it would impact our (indiscernible) business obviously we shut it down, it’s impacted quite a bit, and we also assumes potentially in some of our other businesses, not a 100% show where, but we put something for that, so that’s how the $60 million came about.

Andrew Peranick – Bastogne Capital Management, LLC

Okay. So roughly $50 million to $60 million is pay-per-view?

Vincent K. McMahon

A little bit more than that, but yeah, roughly.

Andrew Peranick – Bastogne Capital Management, LLC

Okay. And did u give or do you mind giving a rough idea of what the domestic buys in pay-per-view for WrestleMania last year?

Vincent K. McMahon

Yeah, we published that is 720,000.

Andrew Peranick – Bastogne Capital Management, LLC

Okay. So roughly you lost 700, so cost 50% of the paper-view-buys.

Vincent K. McMahon

A little over that.

Andrew Peranick – Bastogne Capital Management, LLC

Okay. So if I was to basically then just extrapolate that across the Board, and say where I’m going with, this is assuming that if you didn’t add one single subscriber from where you are right now and the pay-per-view trend stayed the same as for WrestleMania considering you’re growing the market. Cannibalization then would come down by about $25 million, so we would be looking at $35 million of cannibalization and you’re basically on a consolidated basis at 670,000 subs, losing about 10 million bucks right now, and you get to break-even then on that math of somewhere between 750,000 bucks and 800,000 bucks.

Vincent K. McMahon

Andy, we’re going to have follow up with you on that because I lost you about half way through the dictation.

Andrew Peranick – Bastogne Capital Management, LLC

Okay.

Vincent K. McMahon

And I thought it was good enough for us…

Andrew Peranick – Bastogne Capital Management, LLC

No – effectively what I would ask on a hired-view level is clearly 750 last year – a million fifty plus domestically for WrestleMania you’re growing the market, so effectively what I’m trying to suggest to you is that $60 million looks pretty conservative in terms of cannibalization and that break-even number on a consolidated basis is lower than a million bucks?

Vincent K. McMahon

I’ll say two things on that. Everything else being equal at 660,000 so may be 1 million subscribers you may be right. I’m not sure you’ll be right at 2 million to 3 million, but the other element everything is not necessarily equal. We know for a fact that DirectTV is not taking our next pay-per-view and frankly we’re not sure who will and won’t from this going forward, so there is two people that need to agree to have a pay-per-view business, it’s not just in our hands. So that’s another thing to keep in mind.

Andrew Peranick – Bastogne Capital Management, LLC

Okay. I don’t have this, but I think Vince, I think you just made the comment in the shareholder meeting that if I was to call their customer service that they would direct me to the network. Is that correct? Is that still happening?

Vincent K. McMahon

That’s right. This has made a public statements, so I don’t want to say, but if you do call our customer service as we have. Yes, right, they’re pushing into the network app.

Andrew Peranick – Bastogne Capital Management, LLC

Okay, great. And then just one last question and then I will leave you alone, I’ll hop off line, but in terms of the revenue numbers none of this includes any advertising dollars. Is there any thought as to when you may see some additional revenue in the network through advertising?

Vincent K. McMahon

Yes, we haven’t been public as to a timeline, but obviously we’re looking at the overall business model and obviously that would make sense for our consumers experienced the business.

Andrew Peranick – Bastogne Capital Management, LLC

Okay, great. Thanks a lot. I appreciate it.

Vincent K. McMahon

You’ve got it, thank you.

Michael Weitz

Well, we’re ready to take the next question.

Operator

Thank you. Our next question comes from Mr. Robert Routh from National Alliance. Please go ahead.

Robert Routh – National Alliance Capital Markets

Yeah. Thanks for taking my question. First as far as original programming, obviously you guys have a great franchise – the best franchise in wrestling related content. And your first non-wrestling against piece to show house of legends did premier on the WWE network. I’m just curious its going forward how much have been on spending in non-core wrestling based content on the programming side, and then whether you plan to capitalize that or expense it as incurred. So is it going to reflect on the balance sheet or not in terms of what your goals are there as far as programming?

Vincent K. McMahon

Yeah. So, we are not going to talk specifically about what percentage over the class around non-invent show like Legend’s House, we will say that Legend’s House is doing great on the network, it’s been a number one and number 2 show in viewership since its launched. So we’re really excited about that the great show and I think we had a national media outlet, saying that it’s must watch TV.

So we’re excited about all of that. To your more technical question, what we’re doing with the show that first run on the network like Legend’s House is as they are being developed, we capitalize them and then we expense them 100% on first, so we don’t have an ultimate model on them. So we have taken pretty conservative approach. Whether that will sit on the balance sheet for some period of time in the timing of whether it get expenses or not depends on when it was created versus when it gets shown.

Robert Routh – National Alliance Capital Markets

Right, right. Great. And as far as how many original programming shows, you can give us any sense of like all you need is one house of cards or one game of thrones and obviously subscriptions for WWE network, will go off the chart especially as for DirectTV and others aren’t carrying, the pay-per-view as you combine that with a hit show like I – what HBO has done in some of the other – I’m curious as to how many shows ultimately that you could have by the end of the year?

Vincent K. McMahon

Well, so far we’ve had WWE Countdown, which is another one of the top rated shows on our network and Legend’s House, and then as I mentioned in the script, coming is Countdown season 2, Monday Night War and Tough Enough. So there is three more. We obviously know well the value of the compelling original programming, so we really focused on creating that.

Robert Routh – National Alliance Capital Markets

Okay, great. And just one follow-up question, obviously a lot of investors are unclear as to added value WWE, some doing as a multiple of EBITDA, OIBDA, free cash flow, do you try to look at earnings. How do you think that investors should look at the company, how do you look at it internally from a DCF point of view and multiple of one of these metrics, there is some other way to really capture the true value of what WWE has and what you can see on the balance sheet as well as the tons to value you have that is not reflected on the balance sheet, because of things they’re expensed as incurred and like that. How do you think we should look at your competitor company for valuation?

Vincent K. McMahon

It’s, first of all I say, I look at all of the metrics that you mentioned and I think they all had some level of value but February 24, was not only a big day, because we wanted some incredible innovative products, but it is a pretty significant pivot in the business model. I mean, kind of piggybacking on long, more as said we have a big global audience. This is a global platform we’re going global with it quickly.

So you have a platform for some pretty significant long-term growth. If we’re successful, I think similar to the Netflix, the pivot in the business model, maybe more of a valuation at this point and I may not have said this a year ago on per subscriber, I think that maybe the way to move.

Robert Routh – National Alliance Capital Markets

Okay, fair enough. And just one final question. Given that it is very difficult to value the different parts of business separately because of our leverage off each other to create values for the whole of the company. Would you consider selling equity in the WWE network 2A partner, is somebody was efficient in doing such as long as you continue to maintain or is that something it’s off a table, you would need to consider it this year, or by a corner, which we will, with interesting first, purchasing a minority stake in the WWE network for whatever purpose is that something you consider?

Vincent K. McMahon

What Rob, you try to know as well enough we are creative people will consider anything, if we think it makes business sense, so we never push anything off the table, but I would tell you that we have a high value that we’re placing on the WWE network.

Robert Routh – National Alliance Capital Markets

Fair enough. Great, thank you very much.

Operator

And thank you. Our next question will come from Mr. Brad Safalow from PAA Research. Please go ahead, sir.

Brad Safalow – PAA Research

Thanks for taking the questions. Just a question on G&A, are we as a company at this point at kind of a steady state level given all the investments you’ve made in the first quarter or do you think with international some of the marketing you’re doing there, that it will increase sequentially from the first quarter levels.

Vincent K. McMahon

I think you’ll see a little bit of increase. We’re still investing internationally, Brad. It’s –especially as the network goes global that will be something we need to do to support its growth. And just to be clear just could you mention that in that Corporate and Other, you essentially have half the as pure G&A, legal, finance, HR, IT and the other half coming primarily from four areas. Our account development, our international, our integrated sales team, so those are the big areas that’s in there, and our marketing team. And they can logically allocate back to all the other segments, so those are the big drivers and those are really important to driving the overall business growth.

Brad Safalow – PAA Research

Okay. And can you comment on what percentage of subscribers signed up for automatic renewal on network.

Vincent K. McMahon

Yeah, we haven’t been public with that, Brad.

Brad Safalow – PAA Research

How was it relative to your expectations?

Vincent K. McMahon

One of the things that – there was no data point or benchmark, so wasn’t something that we really thought much about, obviously the more we got, the better it was, but it wasn’t like we had a benchmark where we could plug that in. So, we’re not going to say anything public about that.

Brad Safalow – PAA Research

Okay, and just so I can take the correct conclusion from the line of question surrounding the international level profitability. You were talking about incremental contribution margin of 80% to 85% exclusive of periods when you have investments for launch in a particular country. Is that correct, in terms of additional subscribers.

Vincent K. McMahon

Yeah, I think and it all depends – one of the unknowns is really the how many subscriber come through the platforms and things like Apple TV for example and how that evolved over time. But I would say, right now that 80% to 90% is a good number for incremental subscribers.

Brad Safalow – PAA Research

And just a question on cost allocation, because you’ve now put pay-per-view into this kind of one line item for network, which I understand pay-per-view eventually goes away. How should we think about the composition of talent related costs in that line item?

Vincent K. McMahon

Yes. For right now what we’ve done is the talent-related that existed in pay-per-view exist in this current segment as well and pretty much unchanged from an absolute perspective.

Brad Safalow – PAA Research

Okay. And in terms of – I don’t know if you’ve commented on this, but historically, talent has had a kind of competition – an element of a competition tie to pick seems like that, what is the model going forward?

Vincent K. McMahon

Yes, we haven’t commented publicly on that.

Brad Safalow – PAA Research

Okay. Then just say a question, not on the right free negotiation because I know you’re not going to comment, but we’ve seen a lot of variability in the incremental margins, really just the absolute margins surrounding the TV business. Can you comment on what the incremental margin will be on whatever deal you negotiate it, U.S., UK is done. Obviously, UK is done. India as we go forward on the increase in revenues.

Vincent K. McMahon

Yes. We’re not going to comment on that as today, what you have seen in that and it’s a true picking it up on the moving of the margins, is because when we do show like total divas, you get a fairly significant increase in revenue, but it’s a very slim margin. Now, the opportunity is long-term as you exploit it, because we all know that the copyright so we can exploit that over the long term, but in the period that is produced and air is actually a fairly tight margin. So it doesn’t impact the overall TV licensing margins.

Brad Safalow – PAA Research

Okay. And then just a question on whenever you announced the domestic deals in terms of what we should expect to actually host the call or you just going to have a press release, you have details on the contract, what should we expect to see?

Vincent K. McMahon

Yes. Like as I said in the prepared statements, we’ll give more guidance when it’s appropriate.

Brad Safalow – PAA Research

Okay. I’ll turn it over. Thank you.

Vincent K. McMahon

Thanks Brad.

Operator

And our next question here comes from Mr. Lance Vitanza from CRT Capital Group. Please go ahead.

Lance Vitanza – CRT Capital Group

Hi, thanks. So media companies with no debt are something of a rarity in my experience. And I’m wondering if you could share with me your approach to the balance sheet, and is there perhaps an opportunity at some stage to take on some leverage in improved returns to shareholders or how you’re thinking about? Thank you.

Vincent K. McMahon

Yeah. We haven’t commented on capital allocation or future capital allocation, as if you look at historically given our dividend, we’ve been fairly aggressive returners of capital. So that’s our public statements then.

Michael Weitz

Joe, we are ready for the next question.

Operator

Oh, yes. Thank you. And our next question will come from Mr. Daniel Moore from CJS Securities. Please go ahead.

Daniel Moore – CJS Securities, Inc.

Thank you again. Is there a revenue sharing component to the expected agreements similar to Apple and would you expect when you launched with Amazon Fire TV, what would be the terms there as well.

Vincent K. McMahon

Yeah. I mean, we are not going to get into specifics terms in different agreements but all of these platforms have different model that they propose and they negotiate through them, obviously Apple’s given their scale and size as a most well-know, and if you do something in App, it’s 70, 30 if you do it out of the App, the company keeps all the revenue and all the other ones has things like that, but they’re all different numbers, we are not going to comment on other ones because they are not as public.

Daniel Moore – CJS Securities, Inc.

Okay, thank you.

Michael Weitz

Joe, we’re ready for the next question.

Operator

And at this time, I’m showing no further questions. I’ll now turn the call back over to Mr. Weitz for closing remarks.

Michael Weitz

Thank you, everyone. We appreciate you listening to the call today. If you have any questions, please do not hesitate to contact us, me, Michael Weitz at 203-352-8600. Thank you.

Operator

And thank you ladies and gentlemen, this concludes today’s conference. Thank you for your participation and you may now disconnect.

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